Gross profit - How to calculate your business's gross profit. Read more here
What does gross profit mean? Learn how to calculate your business gross profit!
Understand gross profit: Calculation, application in accounting and examples for manufacturing and trading companies
What does gross profit mean?
Gross profit is a key indicator of a company's financial health. It represents the difference between a company's revenue and the direct costs associated with producing the goods or services sold. Gross profit provides a clear picture of how effectively a company generates earnings from its core operations.
Usage in accounting
In accounting, gross profit is used to assess the company's ability to generate profit from its core business before accounting for indirect costs such as administration, sales, and marketing. It is an important indicator of the company’s financial performance and is often used in analyses and reports for both internal and external stakeholders.
Gross profit for manufacturing companies
(Revenue - Production Costs) = Gross Profit
Gross profit for manufacturing companies is typically calculated this way, as these companies deal with production costs rather than cost of goods sold.
Gross profit for trading companies
(Revenue - cost of goods sold) = Gross Profit
Gross profit for trading companies is calculated this way, as these businesses deal with the cost of goods sold rather than production costs.
Example of gross profit calculation for a trading company
To calculate gross profit, the following formula is used:
Gross Profit = Revenue - Variable Cost of Goods Sold
Assume a company sells products for 1,000,000 DKK over the course of a year. The cost of goods sold is 400,000 DKK.
The calculation of gross profit would be as follows:
Gross Profit = 1,000,000 DKK - 400,000 DKK = 600,000 DKK
This means that the company's gross profit is 600,000 DKK, which represents the amount available to cover fixed costs and generate profit.
What does gross profit mean? Learn how to calculate your business gross profit!